Transaction Processing Companies Examined - Wall Street Transcript

Transaction Processor Companies Examined in Wall Street Transcript Business Services Report

67 WALL STREET, New York - The Wall Street Transcript has just published its Business Services issue, a report offering a timely review of the sector to serious investors and industry executives. This 55-page feature contains a roundtable forum and industry commentary through in depth interviews with CEOs from 7 firms and 3 analysts.

The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online®

Topics covered: Relative valuations, Stock performance year to date, Organic growth, Slowdown in outsourcing services, Outlook for transaction processors, Call centers and customer care, International business outlook, M&A activity, Growth in Eastern Europe, Indian IT vendor stocks, Accounting software space, End markets, China, India, Turnaround situations, Merchant acquirers, Investor interest, Stock picks, Stocks to avoid.

Companies include: Global Payments (GPN); Advent Software (ADVS); SEI Investments (SEIC); Heartland Payments (HPY); Fidelity National Information Services (FIS); MasterCard (MA); Visa (V); Alliance Data Systems (ADS); Yucheng Technologies (YTEC); Fiserv (FISV); Net 1 UEPS (UEPS); Ness Technologies (NSTC); VanceInfo (VIT); Cognizant Technology (CTSH); Sykes (SYKE); Genpact (G); TNS (TNS); Wright Express (WXS); CyberSource (CYBS); Jack Henry (JKHY); S1 (SONE); Robert Half International (RHI); MPS Group (MPS); Heidrick & Struggles (HSII).

In the following brief excerpt from the 55-page report, the analysts discuss the outlook for the sector and for investors.

TWST: Andrew, how has business been relative to what you had expected so far this year?

Mr. Jeffrey: I think it's been pretty strong although somewhat bifurcated relative to my expectations. I think what you've seen is that those companies with exposure to financial institution end markets have put up relatively mixed results, although on balance, I'd say maybe a touch better than what I'd anticipated to date, given the credit carnage in the financial markets. Those companies in payments which are touching the consumer, be that merchant acquiring or the network models, have actually done extremely well - if you think about MasterCard (MA) and Visa (V) and to some extent Global Payments (GPN), largely because they have good pricing power, they are taking share and they are in the sweet spots of their operating leverage curve. So on balance, I'd say things are in line to be a little better than expected.

And from a stock market standpoint, it is a question now of whether investors are willing to pay premium multiples for slowing growth, or whether they are digging around for value. It looks like maybe there is a bit of a rotation starting to take place toward more value oriented names in the space.

TWST: David, same question. How have things been relative to what you anticipated?

Mr. Koning: I'd say in the core processing group, it's interesting. There has been a lot of skepticism, given their end markets are the financial institutions that have struggled quite significantly, but because the systems they provide are so necessary for the banks, they really haven't seen much of an impact at all in spending. In fact, the overall market growth remains roughly in the mid-single digits, maybe 1% or so below where they would have seen growth in a normal environment, but overall, quite similar to a normal environment.

And then I would say in the call center area, we've seen some individual companies put up poor results. But overall, in the end, trends seem to be relatively intact. We've had different problems such as currency pressures or big client exposures hurting some of these companies, but overall demand is reasonably intact. So despite the market skepticism across several of these groups, the results have been reasonably as expected.

TWST: Tom, what's your take on what you've seen so far?

Mr. McCrohan: Results for the most part came in a little better than we were anticipating. I think we were postured pretty conservatively going into the quarter; we had some concerns on some of the merchant acquirers in particular, given the slowdown we've seen on credit, but they've all reported better than expected results.

There was one name that I follow that's really outside of payments called Advent Software (ADVS) that develops and sells portfolio accounting software for investment managers and hedge funds, and that name really had a good quarter for a software company. None of the software companies were saying they were seeing any slowdown, but we are of the opinion that you'll see it when you see it, and so we thought this was going to be a white-knuckle quarter for us, and in the end they had really strong bookings growth.

There's an important distinction within the software market; we don't follow a lot of software companies, this is kind of a one-off name for us. But the distinction is between those software companies that sell to the consumer (they have had some struggles) and those that are selling to institutional clients, such as Advent Software. Bookings growth and trends are staying really healthy for firms selling to institutions and for this company in particular, bookings growth has averaged about 50%.

TWST: Jamie, how have things turned out relative to what you anticipated?

Mr. Friedman: We've noticed in the second quarter that in IT services, stocks performed based on expectations, maybe even more pronounced this quarter than in the past. The Indian IT vendors stocks came under significant pressure. There's a significant deceleration in outsourcing relative to last year. There was some expectation mid-quarter that the companies' growth could recover. But their guidance was just too bearish and the stocks in general really sold off.

Exceptions appear in pockets, like outside of India, in Eastern Europe and China. There's a company called Ness Technologies (NSTC) that now does most of its revenue in Eastern Europe, which appears to me to be the healthiest IT outsourcing market in the world right now. Ness put up 70% year-on-year growth in Eastern Europe and that stock has really responded. The same is true in China, where VanceInfo (VIT) operates.

There does appear to be some disruption now in the third quarter related to the Olympics, particularly in the month of August, but it's a huge end market and the demand trends seem to be healthy. There's a small company in China called Yucheng Technologies (YTEC) that we cover. Their revenue appears to be far in excess of what we had anticipated. So it's been a mixed bag of slower growth in India, good growth in Eastern Europe, and steady growth in China.

TWST: Jamie, what's your thought as we look out? What's going to go on in the space given the economy?

Mr. Friedman: I just want to make sure we harmonize the conversation - business services is a broad space. There are a lot of different industries and companies. It sounds like the direction of the conversation is more toward the transaction processors. I may have been answering in terms of the outsourcing IT service consulting firms.

TWST: We're going to touch on all of them.

Mr. Friedman: Okay, let me start first with the IT outsourcing services. I think it's going to be the same trend. If you can, identify small cap value with good markets, with the thesis being that if you're in a good market it's easier to fix the business than if you're in a challenged market. I continue to like the themes that I am seeing, that I mentioned in the beginning in China and in Eastern Europe. NSTC is one, VanceInfo is another, and YTEC is a third. I may be the only guy here who has ever even heard of those companies, so that may be too obscure a subject! To open it up more generally, I'm still cautious about the overall demand trends domestically both on the corporate and the consumer side, though I do think there will be something of a budget flush if there's any budget left to flush by year-end. A company like Cognizant (CTSH), which is a larger cap vendor, they just came into the year with too high expectations and did have to reduce those, but it's a 15 multiple stock that now seems to have good visibility to a 30% plus growth year. 30% growth in a recession, although it may be much lower than their historic growth, is pretty good for a 15 multiple. So that gives you a mix of names - China, Eastern Europe and the US.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 55-page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online

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